George Weinberg posted some interesting and detailed arguments against neocameralism, the general focus of which is that I'm abusing the word "corporation." Since he's right that I'm abusing the word "corporation," he scores a hit and throws me onto my back foot.

Note that this is why I usually try so hard to work around ambiguous words. Fortunately, there is no need for coinage in this case. A much better word is readily available: institution.

An institution is a group of people working together to achieve some shared goal that demands detailed cooperation. This requires coordinated decision-making, or management.

The management of an institution can also be defined as its decision algorithm. There are two general classes of decision algorithm: formal and informal. A formally managed institution has a formal process by which decisions are made, and it does not deviate from this process, ever. Any deviation can be described as a formal violation.

An informally managed institution is also known as agang. Informal management, while it can be quite regular and often even transitions into formal management, is fundamentally inseparable from violence, because violence can affect its decision algorithm. If the institution has any potential for profit at all, the powerful will turn it to their own profit. If there is any noncriminal use of informal management, it may be acceptable in knitting circles, as long as your knitting circle has no more than six people and none of them keep their needles sharp.

A gang big or strong enough to have an ideology, such as your average militant movement, people's liberation front, political party, etc, etc, can be called a supergang. And a supergang that maintains exclusive control of geographic territory is a metagang - it has gone so far beyond mere ganghood that it deserves at least a little pseudoclassical dignity.

There are two general classes of formally-managed institution: eleemosynary and lucrative. Basically, an eleemosynary institution is a charity and a lucrative institution is a company. Gangs do not exhibit this dichotomy, because there is no such thing as an eleemosynary gang.

Both lucrative and eleemosynary institutions have a single logical owner. That is, we can define the institution as if it was simply directed by one person, although this agent may be an algorithm which takes inputs from many people and integrates them into a decision stream.

One of the great social-engineering inventions of the last two centuries was the concept of fractional control. Under fractional control, a single logical owner can be divided into fractions. The institution has an arbitrary number of personal owners, each of whom owns some fraction of it. The fractions sum to 1.

Fractional control requires a decision algorithm to integrate the decisions of these fractional owners. For example, one simple fractional control algorithm is majority rule, in which any fraction that sums to greater than 0.5 can make any decision. Obviously, this number and this rule are arbitrary. Decision algorithms can be arbitrarily complex - although when they are so complex as to be ambiguous or even just incomprehensible, the risk of informalism increases.

One fractional control algorithm that has proven very effective is indirect fractional control. In indirect fractional control, two algorithms are used: one to choose a controlling committee, and one to make decisions within that committee. A controlling committee is a small group of old white men, sometimes with a token woman, black or Irishman, who make decisions in a personal and collegial way, typically over martinis after a round of golf. However, these controllers still have formal rules for resolving disagreements, although ideally they never have to use them.

Note that indirect fractional control seems to work quite well for both eleemosynary and lucrative institutions. In both "nonprofits" and "corporations" as we know them today, the controlling committee is called the "board of directors."

I am not quite sure how the average American 501(c)(3) nonprofit selects its board. I suspect the process is far too informal for my liking. In my book, the correct primary control algorithm for an eleemosynary institution is obvious: the donors are the owners. A donor's fraction of indirect control is that fraction of the institution's total lifetime donation receipts that he or she has contributed. Anything else strikes me as, quite frankly, dodgy.

The essential question about any institution is how its actions benefit its owners. Every formal institution by definition does what its owners want it to do. An institution may affect a large number of people in a variety of ways - for example, I am thankful that there is a new organic grocery down the street. But I am not a formal beneficiary of this institution, because I don't own any part of it.

We think of an eleemosynary institution as existing to benefit the public. Typically this is the case in some general way. But formally, it is not the case at all - as in a lucrative institution, the beneficiaries of an eleemosynary institution are its owners.

An eleemosynary institution can benefit its owners either actively or vicariously. An active eleemosynary institution affects its owners' lives directly. A vicarious eleemosynary institution does not affect its owners directly; instead, it affects something else in the world, in some way that pleases its owners.

A bridge club is an active eleemosynary institution - it benefits no one but the bridge players, who presumably control it. A battered women's shelter is a vicarious eleemosynary institution - while I'm sure there are exceptions, its donors are seldom in need of its services.

No clear distinction can be drawn between the active and vicarious cases. Recall the definition of human action: the goal of action is to alter the state of the world, to one the actor prefers. Whether active or vicarious, an eleemosynary institution acts on behalf of its owners, who control it. Thus, as always, control and benefit are aligned.

Or, at least, it should. But it doesn't always. Any formal institution, eleemosynary or lucrative, has the potential to evolve into an informal institution, ie, a gang. We can describe an institution which is unlikely to degenerate in this direction as stable, and one which is likely to degenerate as unstable.

As I see it, there are two ways to ensure that an eleemosynary institution remains stable.

One is to ensure that it controls no capital. A bridge club, for example, owns nothing except a few decks of cards, and a can of Mace to cool the ardor of any old ladies who get too excited and start to trump each other with rubber dummies. Since the definition of capital is that capital is lucrative, and since all gangs are lucrative, an eleemosynary institution which controls no capital is stable. Deductive reasoning at its finest, folks.

Two is to ensure that its activities are regulated by a superior authority. Obviously, most "nonprofits" are in this category. A regulator uses overwhelming force to prevent or deter the eleemosynary institution from devolving into a gang.

Regulating vicarious eleemosynary institutions is pretty easy. It is a matter of enforcing contract law, just as in the case of lucrative institutions. The natural conflict is that the owners want to shelter battered women and help them back to independence by providing a secure and supportive environment, whereas the managers want to sell the shelter for conversion to luxury condos and squash courts, invest the proceeds in a hedge fund run by their cousins, and move the women into a stack of dog cages in the parking lot. If the law is enforced, the owners win - end of story.

Active eleemosynary institutions are much harder to regulate. An active eleemosynary institution is almost the same thing as a lucrative institution, except that lucrative institutions benefit their owners by paying them in money. In an active eleemosynary institution, the benefit to the owners is intangible and unquantifiable.

It's easy to regulate a lucrative institution, because it's basically obvious whether or not it is violating formality. A lucrative institution is formal if it follows its decision algorithm, and it pays an equal dividend to each holder of each share. Because dividends are paid in money and money is amenable to mathematics, this is not hard to check.

At least, it's not hard relative to the problem of regulating active eleemosynary institutions. The problem of regulating the decision algorithm is identical. But how can we know that the institution is actually benefiting all of its owners equally? Perhaps 60% of the shareholders have organized as a gang, and are directing all the institution's benefits to themselves, screwing the other 40%? Opportunities for friction abound.

Unfortunately, it's hard to provide examples of how hard it is to regulate active eleemosynary institutions. This is because significant active eleemosynary institutions are quite rare. The closest examples are cooperatives, which when they work - which is certainly not always - tend to do so by adopting the standards and practices of lucrative institutions.

Unless, of course, we count the modern democratic state. Which is - or at least purports to be - a self-regulating active eleemosynary institution.

With a very unusual decision algorithm. Which resembles no decision algorithm in use by any other formal institution, active or vicarious, eleemosynary or lucrative, past or present. But to which many ascribe quasi-magical qualities of truth, wisdom, righteousness, etc. Not unlike other decision algorithms used in the past, which we now recognize as thoroughly informal. But clearly more adaptive than any such predecessor.

Do you ever get the feeling Occam's razor is trying to tell you something?

Let's face it: that last season of the Sopranos sucked. Actually, the last two seasons sucked. Actually, make it the last three. However, when Christopher explained to his AA sponsor that his higher power was his Mafia oath, it made up for a substantial fraction of the suckiness.

Suppose the democratic state is not a stable eleemosynary institution. Ergo, since today's democratic states were not born yesterday, they are not eleemosynary institutions at all. Ergo, they must be informal institutions.

"Informal" being a nice word for "criminal." Do you really think that in a state that's a criminal institution, everyone goes around thinking that the state is a criminal institution? How long would such a state last? Just because the state isn't a stable eleemosynary institution, doesn't mean it's not a stable criminal institution.

Au contraire - in a stable criminal institution, all or almost all of that state's subjects will worship it. They will not even consider it morally neutral. They will think of it as good and holy and true. It will be their higher power, their Mafia oath. We see this in all the great metagangs - Nazis, Communists, Jacobins, etc, etc.

Of course, the Nazis, Communists and Jacobins were not just criminal states. They were murderous states. Clearly, there are essential moral and organizational differences between these systems of government and the Western postwar democracies.

On the other hand, there are also essential differences between a murderer and a bank robber. If we accept that a criminal state need not be a murderous state, we should expect to see a second tier of criminal states after the murderous states - ones which are not murderous, but merely felonious, venal, or otherwise larcenous.

Yet, in the conventional story, this tier does not exist - at least not in the First World. Instead, World War II and the Cold War were contests between murderous states, and those that were good and sweet and true. Specifically, when we look at the Nazis, the Communists, and the Universalists, we have a choice: either we are looking at two murderers and a felon, or two murderers and a saint. Two metagangs and a charity - or three metagangs.

Hm.

Next week (remember, UR posts appear regularly every Thursday morning, as well as whenever else I feel they should appear), we'll look a little more closely at the fascinating subject of corruption.

32 Comments:

Mencius: The basic problem with your position is not that reasonable people disagree with you about what states are, but that they disagree with you about what corporations are.

Common sense, which you so recently endorsed, STRONGLY suggests that people are not rule-following automata. Corporations are not nearly as formal as you would like and you have not suggested any way of making them so.

Really though, the problem is deeper. Formal institutional mechanisms are always emergent from and grounded in informal evolutionary psychology derived ape social behavior. This is why it's not a coincidence that CEOs and presidents alike are tall.

Really though, the problem is deeper. Formal institutional mechanisms are always emergent from and grounded in informal evolutionary psychology derived ape social behavior. This is why it's not a coincidence that CEOs and presidents alike are tall.

Controlling for IQ, they're average. In other words, the problem isn't that tall people get excessively good treatment, but that height correlates with ability (this is probably due to childhood nutrition, which can reduce height and IQ).

I suspect that the regulation problem is an information problem. If you create 'fairness derivatives' for different enforcement agencies, and have contracts with them that are adjusted based on changing fairness estimates, you'll solve a lot of that problem.

In my book, the correct primary control algorithm for an eleemosynary institution is obvious: the donors are the owners. A donor's fraction of indirect control is that fraction of the institution's total lifetime donation receipts that he or she has contributed.

I imagine most owners aren't interested in control, otherwise they'd fund things directly rather than through an organization. The act of donating expresses confidence that the management of the institution will spend the money in ways the donor approves of. In any case, for some eleemosynary institutions the vast majority of donations were made by people who are now dead.

I think there are special problems faced by institutions that exist for many generations, particularly in the absence of some external regulating authority. People don't necessarily feel morally bound by the promises made by others generations before, and it's not clear to me that they should. The dead have no authority over the living, right?

As a director of three non-profit organizations I can tell you that not one of them selects its directors based on fractional control by donors. The methods vary.

Typically a non-profit is chartered under state law which provides for non-profit corporations which do not have shareholders but do have members. Some have memberships for donors and others confine the actual membership in the organization to the directors. One of the boards on which I sit is chosen by co-optation; in other words, after a director resigns, dies, or otherwise is incapacitated from serving, the remaining directors elect his replacement.

In any event, having drafted by-laws specifying purpose and structure, and having been chartered as a non-profit corporation by one of the state, the organization then seeks approval by the IRS as a 501(c)(3) corporation. If approved it receives an "advance ruling" under which it operates for five years, at which time it makes application for final ruling on its tax-exempt status. It must submit Form 8734, Support Schedule for Advance Ruling Period, showing that it has received a sufficient percentage of its funding from public support, in order to avoid being classified as a private foundation. Assuming it receives approval of this filing it is then permanently classified under section 501(c)(3), entitling those who make donations to it to deduct them from taxable income as charitable gifts.

A level of market discipline is exerted on public charities, to the extent that if they cease to support the purposes for which they were founded, this fact eventually becomes known, and leads either to the correction of the behavior or the drying-up of their public support. This is not to say that abuses do not take place, or in some instances, persist for a length of time before being detected. It is, on the other hand, impossible to conceal these failures completely and forever.

A worse problem than that posed in the case of eleemosynary institutions operating via ongoing donations from the general public is that of the great testamentary foundations, which quite typically go off the intended path sometime after the death of the person or persons who endowed them. The Ford Foundation, the Rockefeller Foundation, the Pew Charitable Trusts, and the MacArthur Foundation are among the most prominent illustrations of this phenomenon.

The only prophylactic measure against this malady is for the donor to provide that his foundation shall be administered after his death by persons he trusts completely to carry out his intentions, and that the foundation shall cease to exist after a finite term of years approximating a generation, or the life span of the administrator(s) chosen by the donor. The John M. Olin Foundation is a successful example, having shut its doors two years ago, after a 52-year run. It is interesting to note that Warren Buffett has made similar provisions for the disposition of most of his fortune.

On the subject of supposedly non-existent "eleemosynary gangs," how are we to classify the fraternal associations that flourished in this country during the 19th century and well into the 20th? To read its detractors, Freemasonry is either a gang or a cult, but it sponsored orphanages and continues to sponsor old-age homes, hospitals, medical research, scholarships for members' children, and other charitable relief. The same could be said of the Oddfellows, Knights of Pythias, Order of Red Men, Elks, Moose, Eagles, Woodmen, and many others. Some of these organizations had insurance operations covering life, health, and disability in addition to the other activities mentioned.

I still have problems with MM's assumption that every individual can be expected to do what's in their best interest all the time. Of course, for large numbers of people it is true, but for small groups or isolated individuals this assumption does not necessarily hold, IMHO.

For example, right now I am sitting in a coffee house in Tashkent, Uzbekistan. The government spends a lot of money on filtering the internet, which inculdes blocking blogger.com. From this post, you can judge how effective it is. However, it does cost direct money as well as a sharp reduction in QoS, because the filters cannot cope with the load. Why on Earth are they doing this? Of course, for most people involved (e.g. the technicians fiddling around with name servers and backbone routers) it is in their best interest (they do stuff, write reports and earn a living). But how about the decisionmaker? Why would anyone in the government order and/or approve such measures except because of a lack of understanding?

Of course, one should be careful with such assessments. It may very well happen that technically ineffective defensive measures are perfectly rational. But filtering the 'net in Uzbekistan does not seem to be one.

I would maintain that there are no formal institutions as you have defined them. If an institution could be run entirely algorithmically, it wouldn't need managers, but in fact they all have them and there's a great deal of importance attached to just who is running things.

This may change in the future, of course -- Google is run by human beings, but seems to be in the business of building algorithmic institutions. But the algorithms haven't taken over yet.

there is no such thing as an eleemosynary gang.

Hamas is pretty ganglike but also has charitable functions (btw, is there any point to using the $20 word "eleemosynary"? Does it have any connotation beyond "charitable"?). And I would guess that the scenes in Godfather II where the young Don Corleone is taking care of some down-on-their-luck coethnics is not an utter fiction.

A criminal gang that takes on charitable functions has just taken one step down the road to becoming a respectible government.

An institution may affect a large number of people in a variety of ways - for example, I am thankful that there is a new organic grocery down the street. But I am not a formal beneficiary of this institution, because I don't own any part of it.

The opposite view, of course, is the current trend to talk about "stakeholders", which basically means that anybody who interacts with an institution in any way gets some voice in how it's run. I'm guessing you hate that term.

in a stable criminal institution, all or almost all of that state's subjects will worship it...They will think of it as good and holy and true. It will be their higher power, their Mafia oath. We see this in all the great metagangs - Nazis, Communists, Jacobins, etc, etc.

I sincerely doubt that any of these metagangs commanded the worship of anything close to a majority of their subjects, let alone "all or almost all", at least not for any appreciable length of time. Of course it's hard to tell, because the subjects had to fake it, but people aren't idiots. Metagangs seize control not by commanding the worship of large numbers but by being better-organized and more ruthless than rival metagangs.

Insofar as states command some amount of worship, they don't do it through ideology. In all three of the cases you cite, the dynamic driving state-worship was more a function of nationalism and war than ideology. And since war can't be maintained indefinitely, none of those gangs was particularly stable -- Communism lasted the longest, but it too burnt itself out eventually. They don't hold a candle to the really stable earlier states that were based on actual worship (dynastic Egypt, say), rather than the weak post-Enlightenment replacements.

Specifically, when we look at the Nazis, the Communists, and the Universalists, we have a choice: either we are looking at two murderers and a felon...

I have no problem with that point of view. But still, I'd prefer to be ruled by bank robbers and con men than murders, wouldn't you?

Being ruled by algorithms of loving grace might be better than either, but I'm far from convinced that's possible or even coherent. Algorithms don't have guns.

As a director of three non-profit organizations I can tell you that not one of them selects its directors based on fractional control by donors.

No - since I've never heard of any such thing, I'd be surprised if it existed. However, if it were legal - innovation in nonprofit governance having been frozen by the Federal regulatory structure, just as has innovation in corporate governance - I suspect it'd be a very effective way to raise money.

A level of market discipline is exerted on public charities, to the extent that if they cease to support the purposes for which they were founded, this fact eventually becomes known, and leads either to the correction of the behavior or the drying-up of their public support. This is not to say that abuses do not take place, or in some instances, persist for a length of time before being detected. It is, on the other hand, impossible to conceal these failures completely and forever.

This is certainly true. I think fractional ownership would be much more effective in controlling abuses, but I'm certainly not suggesting that today's nonprofits are particularly corrupt. Then again, they typically don't have sovereign allodial title to any continents, either.

A worse problem than that posed in the case of eleemosynary institutions operating via ongoing donations from the general public is that of the great testamentary foundations, which quite typically go off the intended path sometime after the death of the person or persons who endowed them. The Ford Foundation, the Rockefeller Foundation, the Pew Charitable Trusts, and the MacArthur Foundation are among the most prominent illustrations of this phenomenon.

I'm glad you mentioned this, because I should have. The case of the Pew is particularly heinous.

But there is another set of institutions which are governed by co-optation: the universities. The temporary quasi-exception of Dartmouth goes a long way toward showing us what the rule is.

On the subject of supposedly non-existent "eleemosynary gangs," how are we to classify the fraternal associations that flourished in this country during the 19th century and well into the 20th? To read its detractors, Freemasonry is either a gang or a cult, but it sponsored orphanages and continues to sponsor old-age homes, hospitals, medical research, scholarships for members' children, and other charitable relief. The same could be said of the Oddfellows, Knights of Pythias, Order of Red Men, Elks, Moose, Eagles, Woodmen, and many others. Some of these organizations had insurance operations covering life, health, and disability in addition to the other activities mentioned.

If the Freemasons had actually lived up to anti-Masonic fantasies, they certainly would have been a terrifying force indeed. But it's my impression that the reality is a lot more mundane. I am not a Mason and know nothing about Masonic governance, but I suspect that it follows by-laws of some sort, as the Mafia clearly does not. And I think the other fraternal organizations are - I'm tempted to say "were," given the decline in their importance to American society, but of course they all still exist - if anything more quotidian.

Also, in general I think the fraternals have had very little discretionary capital to deploy. Businesses like insurance (didn't Jack Nicholson work at Woodmen of the World in About Schmidt) are among the hardest to corrupt. Again, if the Freemasons ever really had gained control over a sovereign political entity, they'd have been every bit as nefarious as the anti-Masons claimed.

I would maintain that there are no formal institutions as you have defined them. If an institution could be run entirely algorithmically, it wouldn't need managers, but in fact they all have them and there's a great deal of importance attached to just who is running things.

By "algorithmically" I meant not that the algorithm synthesizes decisions via artificial intelligence, but just that it integrates input from a set of human decisions - as, for example, a majority vote does. I apologize for the confusion.

I sincerely doubt that any of these metagangs commanded the worship of anything close to a majority of their subjects, let alone "all or almost all", at least not for any appreciable length of time.

I think you are very much mistaken in this opinion. Read Michael Burleigh's history of the Third Reich, for example, or just look at the cover of Richard Evans'. Evans uses reports sent by agents of the exiled Social Democratic leadership within Germany, who in '37 or '38 or so were basically saying rather depressedly that almost everyone supported the Nazis, there was really no hope at all. Certainly the 40% that they won in 1933 was much lower than their popularity later in the '30s.

I have no problem with that point of view. But still, I'd prefer to be ruled by bank robbers and con men than murders, wouldn't you?

Oh, certainly! Far more so than I could possibly understand, I suspect.

For example, right now I am sitting in a coffee house in Tashkent, Uzbekistan. The government spends a lot of money on filtering the internet, which inculdes blocking blogger.com. From this post, you can judge how effective it is. However, it does cost direct money as well as a sharp reduction in QoS, because the filters cannot cope with the load. Why on Earth are they doing this?

I don't have any problem at all in believing that Uzbekistan is mismanaged.

If the mafia who (I assume) controls that country could sell it to General Electric, and if they did, and if five years later it was still mismanaged, I would start to question some of my beliefs.

I imagine most owners aren't interested in control, otherwise they'd fund things directly rather than through an organization. The act of donating expresses confidence that the management of the institution will spend the money in ways the donor approves of.

True, but I think donors would prefer to retain actual control as well. Especially large ones.

In any case, for some eleemosynary institutions the vast majority of donations were made by people who are now dead.

There's no reason donation shares can't be passed on, although there's no reason they have to be, either.

btw, is there any point to using the $20 word "eleemosynary"? Does it have any connotation beyond "charitable"?

Not at all. I just used a $20 word because most people have no emotional associations with it.

A criminal gang that takes on charitable functions has just taken one step down the road to becoming a respectable government.

Which is a pretty good clue as to why they might do such a thing!

The opposite view, of course, is the current trend to talk about "stakeholders", which basically means that anybody who interacts with an institution in any way gets some voice in how it's run. I'm guessing you hate that term.

Oh, yes! But it's exactly what one might expect from people raised to believe in democracy.

me: I sincerely doubt that any of these metagangs commanded the worship of anything close to a majority of their subjects, let alone "all or almost all", at least not for any appreciable length of time.

mm: I think you are very much mistaken in this opinion.... in '37 or '38 ... almost everyone supported the Nazis, there was really no hope at all. Certainly the 40% that they won in 1933 was much lower than their popularity later in the '30s.

We may have to split the difference on this one. In the pre-1933 era there was significant opposition to the Nazis, but it was disorganized and poorly served by its leadership. After the Nazis took power, it's impossible to tell sincere from coerced support, and impossible to tell worshipful support from support because all the other alternatives seemed worse.

Germans have a cultural tendency to fall into formation, so it wouldn't surprise me find that the Nazi memes over time had become deeply rooted. My impression is that in the Soviet Union, people were much more cynical about the regime, and better able to combine external dutifulness with private doubts At least, there was a rich tradition of political jokes from Communist Europe, which it's hard to imagine coming out of Nazi Germany.

We may have to split the difference on this one. In the pre-1933 era there was significant opposition to the Nazis, but it was disorganized and poorly served by its leadership. After the Nazis took power, it's impossible to tell sincere from coerced support, and impossible to tell worshipful support from support because all the other alternatives seemed worse.

From Helmut Kuhn's Freedom Forgotten and Remembered, 1943:

All would be well if only we could accept the story of a Germany frightened into submission and terrorized by a small Nazi minority. Then Germany and Italy would have to be delivered from their oppressors just as Abyssinia has been and Czechoslovakia, Poland, Holland, Belgium, France and all the other victims will be liberated. Assuredly there is terror and compulsion in the totalitarian states. Yet this is only half the truth. It cannot well be denied that both Fascism and National Socialism achieved their success as popular governments. In that sense they are "democratic." It must be admitted that the dictators wield a tremendous power not only over the body but over the mind. They maintain and exercise this power through propaganda. A government may be termed "democratic" insofar as it rules with the free consent of a majority. But what if the consent is fabricated by propaganda? This is a novel problem. Nobody thought it could be done until it actually was done.

(Kuhn, a Christian Democrat, was a World War I officer and philosophy professor at the University of Berlin. He wrote this in exile in North Carolina, where he was a professor at UNC.)

What is the qualitative difference between GE and PanAm?Or Enron, for a more recent example.I can see how market mechanisms provide for efficient allocations of resources, but I fail to see why large organizations full of relationships and incentives that are very far from those in the market would be safe from major inefficiencies and incentive incompatibilities. Large corporations are obviously prone to mismanagement, both rational and irrational.

Smaller organizations definitely tend to be easier to manage, and they are generally more effective.

This centrifugal force is an important element in preventing an efficient world from evolving into One Big Corporation.

However, as GE shows, large organizations can be managed quite effectively. It's just that they aren't always.

The official press, which hates any institution that isn't part of the government, loves to find the failures and wave them triumphantly in our faces. Likewise, if you lived in Germany in 1936, any time a Jew was responsible for some heinous crime, you were sure to hear about it.